FX convergence to trigger new stock market rally
by IHEANYI NWACHUKWU
August 7, 2017 | 1:48 am| | | Start Conversation
The move for a convergence in the foreign exchange market will trigger a new stock market rally.
The FMDQ OTC Securities Exchange which oversees interbank trading, last week asked lenders to publish quotes reflecting trades in the Investors’ & Exporters’ FX (NAFEX) Window, an indication that Nigeria is gradually moving closer to a single naira FX rate, as banks use the NAFEX.
Stocks reached new highs with last week’s N194billion gain and more analysts expect the step to unify multiple exchange rates will impact the market positively. Since a rally spurred by investor optimism on the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) system, equities value has risen by about N4.2trillion in the past three months, from N8.716trillion on April 24 to close last Friday August 4 at N12.899trillion.
Sewa Wusu, head, research and investment advisory, SCM Capital said, “The move to a single exchange rate is positive for the stock market. The stock market always corrects itself to the changes in exchange rate.
“ If there is fluctuation in naira, the exchange rate will most likely adversely affect the stock market. The case is even made worse in an environment of multiple exchange rates. So, the move for a single exchange ensures stability in the FX market.”
As such, for a stable or impressive stock market performance, the exchange rate has to be maintained in a favourable territory or terrain. This single exchange rate is achievable if eventually it is done by the CBN.”
The analyst noted that the introduction of the I&E FX window was a game changer for the stock market, adding that “the single exchange rate of course, will ensure price discovery for the interactions of demand and supply, reflective of the true value of the naira and that would be positive for the stock market in terms of attracting funds inflow into the market.”
FMDQ and traders reached agreement to try to move toward a single exchange rate, the idea is to show the true reflection of the naira in the market.
Furthermore, since the CBN introduced the Investors’ & Exporters’ FX window, the All Share Index has risen to 37,425.15 points, while Year-to-Date (YtD) gain remains positive at 39.26percent.
Nigeria had at least five exchange rates which it has used to mask pressure on the local currency but the Central Bank has been working to converge the rates through interventions.
“The I&E window in terms of transparency and price discovery seems to reflect where the naira should trade. All banks are now putting quotes at that rate,” according to Kunle Ezun, an analyst at Ecobank.
In April, the apex bank allowed investors to trade the naira at rates determined by the market, a move intended to improve dollar supply, but one that introduced yet another exchange rate.
The I&E window which had handled $2.2 billion of FX trade since April, caters mainly for invisible transactions (excluding International Airline Ticket Sales’ Remittances), Bills for Collection and other trade-related payment obligations (at the instance of the customer) and has Exporters, Foreign Portfolio Investors (FPIs), Foreign Direct Investors (FDIs), Authorised Dealers (banks) and other parties with autonomous sources of foreign currency, sell US dollars to willing buyers at mutually agreed rates.
The naira closed at N366.44/$1 on the investor window on Friday, an increase of 20percent or 75kobo against Thursday, at N367.19/$1. The foreign exchange daily turnover skyrocketed to $712.03 million on Tuesday at the investors and exporters window, following banks entrance into the market. It however dropped to $97.03 million on Thursday.
The Naira traded stable at N305.55k at the inter-bank spot market on Friday, after it closed at N305.60k per dollar on Wednesday, data from FMDQ show.
The Central Bank has been intervening on the official market in the last few months, to try to narrow the spread between rates on the official market and black market. It has sold over $5 billion since February.
With the trajectory of Nigeria’s FX becoming an important barometer of the performance of Nigerian equities, analysts see Nigeria missing its best chance in 13 months to overtake bigger bourses like Egypt in stock-market capitalisation, as an expansion of the new FX window spurs a record plunge in the naira.
Unlike Nigeria, whose measures have fallen short of a full currency float, Egypt is gaining from its decision in November, to let the pound’s value be determined by the market. While that initially shaved off 42 percent of the combined value of Cairo stocks, it soon brought in foreign investors, boosting the capitalisation by $12 billion.
Nigeria’s main equity index rose for a fourth day to a one-week high Friday.
United Capital analysts also note from historical data, that while correlations between Emerging Market currencies and equities may not be stable, the Nigerian equity market has always tracked movements in oil price, amid rare derailments.
“The introduction of the I&E window was one of such derailments in which equity and oil price movement diverged,” the analysts added.
Meanwhile, medium-to-largely capitalised companies were major drivers of a record 11.89percent growth seen by the Nigerian equities market in the first-half (H1) of 2017.
By the Nigerian Stock Exchange (NSE) market segmentation, a Large Cap company has market capitalisation that is greater or equal to $1billion; Medium Cap company capitalisation is greater than $150million but less than $1billion; while a Small Cap company has market capitalisation greater than $150million.
The second-quarter (Q2) stock market’s fact sheet shows value of Mid-Cap stocks cumulatively grew by 18.56percent or N430billion in the 52-week, to June 30. It reached a high of N2.70trillion from N2.27trillion in June 30, 2016.
The cumulative value of Largely Capitalised stocks reached N7.81trillion, a growth of 13.53percent or N930billion from N6.88trillion as at June 30, 2016.
Small Cap stocks were major draggers to the NSE growth, following a 52-week decline of 6.24percent or N66billion. Their value decreased to a low of N954.03billion as at June 30, 2017 from N1.02trillion in the corresponding period of 2016.
In the Q2 period, improvements in Nigeria’s macroeconomic environment, as well as increased FX liquidity through the Investor and Export (I&E) window bolstered investor confidence at the Nigerian bourse, giving greater impetus to bullish sentiments that started in the first-quarter (Q1) of 2017.
The NSE All Share Index (ASI) closed the quarter at 33,117.48 points, from 29,597.79 points as at June 30, 2016, to deliver a year-on-year (YoY) return of 11.89percent.
Although the average daily volume of securities traded declined marginally (3.48percent) through the quarter, the average daily value traded across all products on the NSE, increased by 56.83percent to N4.08 billion ($13.33 million), from N2.60 billion ($9.19 million) in Q2 2016.
The analysts at United Capital Plc believe that the performance of equities and other Naira assets in this second-half still hinges on a mix of factors.
“For equities, the sustenance of recent positive momentum means that the improvement in the policy environment must outpace that of Q2-17. To this effect, macroeconomic variables may have to outperform estimates resulting in corporate earnings surprises, while shocks in the system stay rather soft”, the research analysts said.
Afrinvest Securities analysts expect to see market performance largely driven by reactions towards the corporate releases.
Sewa Wusu believes investors are taking bullish positions, due to the positive result, adding that the record positive trend points to a general recovery of the economy.
BusinessDay’s look at the performance by sector, shows that agriculture recorded the biggest gain in the 52-week period under review. The sector’s stocks grew by 85.42percent or N61billion from June 30, 2016 level of N71.36billion to N132.31billion.
It was followed by the Financial Services Sector which grew by 35.55percent or N950billion, to N3.61trillion, from N2.66trillion as at June 30. The ICT Sector is the biggest laggard in the 52-week period, as it lost 26.55percent of its value, worth N12.3billion, from N33.98billion to N46.27billion.
At the end of the quarter, the average price-earnings (PE) ratio of the Exchange’s listed equities stood at 21.07 compared to 29.03 in the previous year, the NSE Fact Sheet also shows.
The equity turnover velocity also increased by 1.97 percentage points to 8.39percent, from 6.42percent in Q2 2016. The dividend yield for the 52-week period ending June 30, 2017 was 5.11percent.
The market snap shot shows total Market Capitalisation (bonds and equities) in H1’17 at N19.03trillion, up 10.07percent from N17.28trillion in corresponding period of 2016; Equities Market Capitalisation at N11.46 trillion in H1’17 grew by 12.68percent from N10.17trillion in H1’16; Bonds Market Capitalisation at N7.56 trillion increased by 6.33percent from N7.11trillion in H1’16.
Total volume of stocks traded in Q2 was 24.44billion, a 9.61percent decline from 27.04billion in Q2’ 16; while Total Value of stock traded (Q2) stood at N240.66bn, an increase of 46.87percent from N163.86billion in Q2’16.
Average Daily Volume (Q2) was 414.29million, a decline of 3.48percent from Q2’16 level of 429.23million; Average Daily Value Traded (Q2) at N4.08billion increased by 47.58percent from Q2’16 level of N2.60billion; while Average Daily Transactions (Q2) at 4,515 shows 12.80percent increase from 4,002 in Q2’16.
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